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Financial Responsibility Composite Scores

Financial Responsibility Composite Scores

Section 498(c) of the Higher Education Act of 1965, as amended, requires for-profit and non-profit institutions to annually submit audited financial statements to the Department to demonstrate they are maintaining the standards of financial responsibility necessary to participate in the Title IV programs. One of many standards, which the Department utilizes to gauge the financial responsibility of an institution, is a composite of three ratios derived from an institution's audited financial statements. The three ratios are a primary reserve ratio, an equity ratio, and a net income ratio. These ratios gauge the fundamental elements of the financial health of an institution, not the educational quality of an institution.

The composite score reflects the overall relative financial health of institutions along a scale from negative 1.0 to positive 3.0. A score greater than or equal to 1.5 indicates the institution is considered financially responsible.

Schools with scores of less than 1.5 but greater than or equal to 1.0 are considered financially responsible, but require additional oversight. These schools are subject to cash monitoring and other participation requirements.

A school with a score less than 1.0 is considered not financially responsible. However, a school with a score less than 1.0 may continue to participate in the Title IV programs under provisional certification. In addition, this lower score typically requires that the school be subject to cash monitoring requirements and post a letter of credit (equal to a minimum of 10 percent of the Title IV aid it received in the institution's most recent fiscal year).

In the event a school with a composite score less than 1.5 posts a letter of credit equal to 50 percent or more of their Title IV aid received, that school is considered financially responsible. As a result, the school may be free of cash monitoring and other participatory requirements if there are no other substantive problems related to its Title IV participation.

Since the financial factors that influence composite scores can fluctuate from year to year, the Department provides schools with alternative methods to demonstrate their financial responsibility (such as cash monitoring and reporting requirements or posting a letter of credit). These alternative measures allow schools to demonstrate their financial responsibility while offering protection to taxpayers and students.

It should be noted that composite scores are only one of several factors that the Department uses to assess an institution's financial responsibility compliance. The other factors include sufficient institutional cash reserves to make the required refunds, including the return of Title IV funds (these requirements are known as the refund reserve standards); the school is meeting all of its financial obligations, and the school is current in its debt payments.

The composite financial score is not a reflection of the quality of education at a given school, and a school that does not achieve a passing financial composite score will be monitored more closely by the Department to determine if additional protections are needed.

NOTE: In accordance with recommendations made in a Government Accountability Office report issued in August 2017, commencing with the Award Year (AY) 2015-2016 disclosure and in subsequent years, the Department will be posting the financial composite score of every individual institution whose score had been finalized and archived as of the date of extraction from the Department’s financial system for the requisite Award Year. Large corporate schools submit consolidated financial statements that include all of the schools under common ownership. For reporting purposes, the Department analyzes the consolidated financial statements submitted by the locator school, which has the annual submission responsibility. Previous to the AY 15-16 disclosure, the Department would routinely post the composite score of only the locator school, as representative of the schools under common ownership. Resultantly, the AY 15-16 disclosure, and those in subsequent Award Years, would logically reveal a higher number of total institutional scores--as well as a likely increase in the number of passing, zone and failing institutional scores--as compared to previous Award Year disclosures. Additionally, to ensure more complete transparency of the financial health of those institutions whose financial composite scores were not finalized at the time of its initial posting due to appeals or other factors, the Department plans to update the report at least once annually beginning with the AY16-17 disclosure, as needed.